updated 10:00 pm EDT, Fri June 7, 2013

After pre-trial remarks, suddenly questions DOJ interpretation

Additional testimony and questioning in the DOJ e-book price-fixing trial against Apple has turned the nature of the case -- which has already become more into a inquiry of Amazon's misdeeds than of Apple's -- so far away from where the DOJ wanted it to go that even Apple's own lawyers sat up and took notice when Judge Denice Cote asked a key question during Friday's hearing. Cote, who in various pre-trial statements had made it crystal clear she believes the DOJ's original claims against Apple, injected doubt into a key part of the prosecution's case.

Cote, who had thus far been stone-faced in her reactions to various witnesses and had asked perfunctory questions to clarify remarks or gird various attorneys' attempts to badger those on the stand -- even avoiding any reaction to a videotape playing of Steve Jobs' brilliant introduction of the iPad, which had a noticeable emotional effect on most others in the courtroom -- suddenly asked detailed questions of Amazon executive (and book deal negotiator) Laura Porco, who had submitted written testimony earlier in the day.

In her statement, Porco said that the week before Jobs introduced the iBookstore, five of the six major publishers told her that "they were requiring Amazon to switch its terms [from the "wholesale" model publishers considered ruinous to the "agency" model Apple and the publishers favored] because that's what Apple required them to do." This contention -- that Apple created or at least facilitated a conspiracy to force Amazon to abandon its loss-leader pricing model and raise the price of e-books to consumers -- is the entire lynchpin of the DOJ's charges against the iPhone maker. The alternative option -- that the publishers came to the conclusion that they must change their deal with Amazon because of the clever way Apple had structured its agreements with them -- would not amount to conspiracy or collusion, at least on Apple's part.

Cote focused on the next sentence of Porco's testimony: "[The publishers] said their agreement with Apple included restrictions around consumer pricing that made it technically impossible to remain on reseller [meaning the "wholesale" pricing model] terms with Amazon or any other retailers." At the time, Amazon had used its monopoly position in the e-book market to win "wholesale" pricing, meaning that it paid publishers about half of the suggested retail price of the e-books and then priced them as it wished.

As it turned out, the company opted to price them predatorily, taking increasing losses on the e-books to sell them at a $10 standard rate for new releases. Publishers were unhappy with this both because it severely cannibalized print sales (which retailed for an average of $26) and because they feared that Amazon would eventually force them to reduce the $12-13 wholesale price in order to stop taking losses on each sale, after it had ensured that no other company could enter the e-book market.

Cote asked Porco if the "restrictions" she referred to could be what the publishers were referring to when they said apple "required" them to change their terms. As Fortune columnist Philip Elmer-Dewitt put it: "in other words, were the publishers' long-standing deals with Amazon now off because of the structure of their agreement with Apple [rather than any] direct instructions from Apple?"

It was the first time that the judge had asked a question that seemed sympathetic to Apple's position on the charge. In addition, the question put the entire core of the DOJ's case into doubt. According to trial observers, Apple's lawyers immediately noticed the change in tone and seized the advantage with the next witness, Google executive Thomas Turvey -- who had negotiated similar "wholesale" deals with publishers prior to Google's launch of an e-bookstore.

As reported earlier, Turvey changed his testimony and admitted that his written testimony was drafted "with the help of" Google lawyers, meaning he was unsure of certain statements made in his own submitted testimony. When challenged, he could not remember any details, names of the representatives, could not produce any notes of the meetings, admitted he hadn't contacted Google with the allegations, and backtracked significantly on his previous claim that representatives of the (then) six publishers told him Apple required them to switch to an agency model due to their contracts.

By the end of questioning, he would only suggest that the representatives "likely" told "someone on his team" about the alleged Apple tactics. Turvey, who appeared shaken by the ordeal of cross-examination, is set to return to the stand on Monday and may face questions on the extent of his testimony's "construction" by attorneys when he faces Judge Cote then.

I agree, drumbot - so many tech analysts and reporters have stated categorically that Apple is guilty and could not win this case. I haven't seen one writer/reporter/analyst/blogger who said Apple even had a chance.

Don't get your hopes up. This is a done deal. It's a show trial to give the impression of impartiality and fairness. Apple will be found guilty and the class action lawsuits will flow like water over a cliff.

Quote: "... the case -- which has already become more into a inquiry of Amazon's misdeeds than of Apple's -- so far away from where the DOJ wanted it to go that even Apple's own lawyers sat up and took notice when Judge Denice Cote asked a key question during Friday's hearing."

That's great news. Apple's lawyers are demonstrating great talent. From the start it's Amazon that should have been under investigation rather than Apple. This DOJ lawsuit has been stupid or something worse.

Personally, I don't live under any illusion that ethics play a major role in the decision making at Amazon, but it is very different from Microsoft. Even in defeat during the 1990s, Microsoft seem to keep plunging ahead. Their geeky upper ranks seemed unable to pick up the warning signals. But in Amazon's case, a single legal defeat seems to turn them around. I suspect that's because, if you look at their upper management ranks, there are a lot of lawyers there. Lawyers do listen to the signals that courts send. I suspect there are a lot of worried frowns in Amazon's corporate offices right now. This attack on Apple isn't quite turning out like they'd hoped.

It may even affirm the legitimacy of agency book prices, something that as an author I strongly support. If I lower the price of an ebook to encourage sales, I don't want Amazon, Apple or anyone ruling that the price remains high. And if Apple wins, it should be a lesson to all the publishers who caved rather than fight. Their out-of-court settlements are still binding.